Why Self-Employed Mortgage Qualification Is Different
A salaried employee generally receives predictable W-2 wages. A business owner's financial picture can be considerably more complicated.
Income may flow through a corporation, partnership, sole proprietorship or several businesses. Tax returns can include depreciation, business expenses and other items requiring analysis before qualifying income can be established.
For that reason, simply looking at the taxable-income figure does not necessarily answer whether a self-employed borrower can qualify for a mortgage.
Traditional Tax-Return Qualification
Conventional and other traditional programs can work very well when tax returns support sufficient qualifying income.
Analysis may include personal and business tax returns, ownership percentages, K-1 income, business financial information and applicable adjustments or add-backs permitted under program guidelines.
When traditional documentation provides adequate income and favorable financing, there may be no reason to use an alternative program.
Bank Statement Qualification
Bank statement programs provide another approach for eligible self-employed borrowers.
Instead of relying primarily on taxable income, these programs generally analyze eligible deposits over a specified period and apply the lender's methodology for determining qualifying income.
Personal and business bank statement programs can operate differently, and the treatment of business expenses can have a significant effect on the final income calculation.
Different Lenders Can Produce Different Results
Alternative-documentation programs are not uniform.
One lender may use a different expense factor, deposit analysis or documentation requirement from another. Consequently, the same borrower and essentially the same bank statements can sometimes produce materially different qualifying results.
Access to multiple programs can therefore be particularly valuable for self-employed borrowers.
Determine the Method Before Submitting the Loan
Our objective is to determine how the borrower should be qualified before sending the file into underwriting.
We review the business structure, income history, deposits, assets, credit and proposed transaction and compare the reasonable alternatives.
Sometimes conventional financing is clearly the best solution. In other situations, an alternative program may recognize the borrower's income more effectively. The correct answer depends on the complete financial picture.